Country Risk Annual Report 2020

Agencies' sovereign ratings and sovereign spreads in the CDS markets have remained relatively stable over the past year despite the current pandemic crisis and the large fiscal and economic activity deterioration, mainly due to the unprecedented support from fiscal and monetary policies

Key points

• Key points:
• Our own estimated sovereign ratings have worsened more than the agencies' ratings, and our estimated equilibrium CDSs have increased significantly, in contrast to the agencies and markets
• Government balances and public debt levels across the board have soared to levels that would normally signal a highly vulnerable position, mainly due to the unprecedented fiscal stimuli required by the public policy measures that have been implemented across the world in order to reduce the economic harm caused by the pandemic
• We estimate that rating agencies have reacted differently to the COVID shock than how they have historically reacted. They have not downgraded or they have maintained ratings despite the great deterioration of the macro and fiscal outlook, probably because they have been weighing up the increase in vulnerability vs. the benefits and support from the fiscal stimuli, and also because of the transitory nature of the COVID shock
• However, if the public policies do not have the expected effects or the economic activity recovers more slowly, rating agencies will have to evaluate the risks in the same way as in the past. In such case, we estimate than (on average) ratings should be at least one notch lower across most geographies
• We have also found evidence that financial markets have priced the macro and fiscal deterioration due to COVID differently this year than in the past, either because they expect more monetary or fiscal stimuli in the future, or because they also believe that the extraordinary policy measures translate into a lower risk than what the hard data would suggest otherwise

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